Follow Warren Buffett in 2014 with These Sector ETFs

The U.S. markets are flying high this year, breaking all previous records. With the Fed finally deciding to clip the pace of the bond-buying program by $10 billion starting in January, volatility has taken a back seat for now. This indicates increased confidence in the U.S. economy’s growth rate and job outlook.

With that being said, investors will continue to pour money into riskier assets such as equities, as a strengthening dollar will once again dull the appeal for safe avenues in 2014. While there are a number of choices available in the space across various asset classes, sectors and companies, it is always difficult to choose the best ones that will provide higher returns.

For making this process simple and easy, investors could follow the legendary billionaire and philanthropist Warren Buffett for the selection of sectors and stocks in their portfolio. Warren Buffett undoubtedly is the most successful investor in the world and made maximum profits from the surging stock market this year, according to the latest study by Wealth-X.

Warren Buffett’s equity stock portfolio is up nearly 27.3% to $59.1 billion in 2013 (as of December 11), which reflects a gain of $37 million per day. The returns are well above the S&P 500 benchmark gain of about 22% (read: 3 Sector ETFs Crushing the Market in 2013).

Going along the lines of Warren Buffett, investors can make more-than-expected money out of their investments in 2014 but with a lower level of risk. This can be easily done in the basket form that comes with low cost and enhanced returns by minimizing the overall comparable risks compared to an individual stock.

Below, we have highlighted three such ETFs from a variety of sectors that could be worthwhile for investors in the coming months that look to match some of Warren’s top sector selections (see: all ETF Categories here):

About two-fifths of the Buffett’s portfolio is inclined toward the financial sector with Wells Fargo (WFC) as the top firm, followed by US Bancorp (USB). Investors seeking to play this sector could find IYG an intriguing option. This fund provides exposure to the banks and financial service stocks by tracking the Dow Jones U.S. Financial Services Index.

Holding 109 securities, the fund is highly concentrated on the top 10 firms at 60% of total assets. WFC occupies the top position in the fund’s basket at 10.59% while USB takes the eighth spot with a 3.60% share. From a sector perspective, banks make up for 55% share while financial services take the remaining portion (read: Can Bank ETFs Bounce Back After Recent Downgrade?).

The product is relatively popular among investors with AUM of $602.9 million and average daily volume of roughly 74,000 shares. The ETF charges 45 bps in fees per year from investors and gained nearly 40% this year. IYG has a decent Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Low’ risk outlook.

Warren Buffett has the second largest holding in the consumer defensive sector with Coca Cola (KO), Procter & Gamble (PG), and Wal-Mart (WMT) as the top stocks in the portfolio. One great way to play this preference is with VDC, which follows the MSCI US Investable Market Consumer Staples 25/50 Index.

The product manages an asset base of $1.7 billion while trades in volume of more than 64,000 shares per day. The ETF charges a low fee of 14 bps per year from investors. The fund is guilty of concentration as the top three firms – PG, KO and WMT – dominate the fund’s return with combined share of 29% (read: 3 Top Ranked Consumer ETFs for the Holiday Season).

Within the sector, the product is widely spread across household products, soft drinks, packaged foods & meat, tobacco and hypermarkets & super centers that make up for double-digit allocation. VDC added over 1.74% this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook.

Last month, Warren Buffett added new stakes in Exxon Mobil (XOM), the largest U.S. oil company, beefing up his energy sector holdings. Investors could better play this action of the billionaire with VDE, which tracks the MSCI US Investable Market Energy 25/50 Index. Holding 168 energy stocks, the product is highly skewed toward XOM with 22% allocation (read: Play the U.S. Oil Boom with These Energy ETFs).

Other Buffett-favorite energy stocks such as ConocoPhillips (COP) and Phillips 66 (PSX) also find its way in the fund’s top 10 holdings. From a sector look, integrated oil & gas make up for the largest share at 40% of assets closely followed by production and exploration (27.40%) and equipment services (17.30%).

The fund has amassed $2.5 billion in its asset base while sees good volume of just under one million shares a day, and expenses come in at just 0.14%. The ETF added nearly 23% this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook.

Bottom Line

Since Warren Buffett is a long-term investor and his portfolio includes safe and quality stocks, investors could definitely reap rewards with these ETFs that follow a stock profile similar to what the Oracle of Omaha owns.